This paper studies a model of optimal redistribution policies in which agents
face unemployment risk and in which savings may provide partial self-insurance. Moral
hazard arises as job search effort is unobservable. The optimal redistribution policies
provide new insights into how an unemployment insurance scheme should be designed:
First, the unemployment insurance policy is recursive in an agent's wealth level, and
thus independent of the duration of the unemployment spell. Second, the level of benefit
payments is negatively related to the agent's asset position. The reason behind the latter
result is twofold; in addition to the first-order insurance effect of wealth, an increase in
non-labor income (wealth) amplifies the opportunity cost of employment and thus reduces
the agent's incentive to search for a job.
During unemployment the agent decumulates assets and the sequence of benefit payments is observationally increasing - a result that stands in sharp contrast with previous
studies.